Washington state considers short sale protection

Washington state considers short sale protection

Banks could soon be barred from pursuing deficiency judgments
against Washington state borrowers after a short sale.  A Senate
committee in the Washington State Legislature will hold a hearing
over H.B. 2718, which states that if a bank "writes off debt from
the short sale, they can't then subsequently collect this debt
from the seller. The bill was modeled after similar action passed
in Oregon last summer.  The bill if passed does not require the
lender to accept a short sale offer. It would go into effect with
90 days of being passed.  According to a Washington Realtors
alert put out late last week, a borrower would report the write
off to the Internal Revenue Service and take a tax deduction for
the loss. This same amount is also counted as taxable income for
the seller.  "Providing certainty and consumer protections for
short sale sellers is critical in the current real estate
market," the trade group said. "Successful short sales often
prevent foreclosures that would harm consumers, tax revenue and
economic recovery."  After the Oregon bill took effect in June,
REO numbers became choppy and then began to fall at the end of
the year. In September, repossessed homes totaled 1,420,
according to RealtyTrac. That number increased to 2,057 the
following month then slid to 936 in November and 874 in December.
 Some of that could be due to seasonal trends. Most lenders put
repossessions on hold during the holiday season, but the December
total was down 29% from the same month one year earlier.

S&P warns of rate cuts over health costs

Ratings agency Standard & Poor's warned it may downgrade "a
number of highly rated" Group of 20 countries from 2015 if their
governments fail to enact reforms to curb rising healthcare
spending and other costs related to aging populations.  Developed
nations in Europe, as well as Japan and the United States, are
likely to suffer the largest deterioration in their public
finances in the next four decades as more elderly strain social
safety nets, S&P said in a report.  "Steadily rising healthcare
spending will pull heavily on public purse strings in the coming
decades," S&P analyst Marko Mrsnik wrote in the report.  "If
governments do not change their social protection systems, they
will likely become unsustainable."  If no reforms are adopted,
healthcare-related credit downgrades would likely start within
three years, eventually leading to an increase in the number of
junk-rated countries as of 2020, the study showed.

Olick - US Treasury forcing principal forgiveness

"Late Friday the US Treasury Department announced a major
expansion of its Home Affordable Modification Program (HAMP).
The three-year-old program has been largely deemed unsuccessful,
as it has provided just about 750,000 borrowers with permanent
loan modifications. The initial expectation from government
officials was that it would help three to four million borrowers.
 'Clearly the initial program erred on the side of making sure
taxpayers were protected, but it didn’t do enough to help the
overall economy,' said Michael Barr, former Asst. Treasury
Secretary for Financial Institutions and one of HAMP’s original
architects.  Now taxpayers will pony up the cash, as Treasury is
tripling the financial incentives to lenders and opening the
program up to Fannie Mae, Freddie Mac and investors in rental
properties. The money would come out of TARP funds, i.e. from the
taxpayers. We still don’t know if Fannie and Freddie will
participate, since their conservator, the FHFA’s Ed DeMarco,
has been actively fighting principal write down for years. A week
ago he sent a letter to members of congress explaining the math
behind his argument.

But the Treasury may be forcing DeMarco’s hand. He claimed that
writing down mortgage principal would cost $4 billion more than
the modifications that Fannie and Freddie are doing now. Those
involve interest rate reduction and principal forbearance. The
newly expanded HAMP, however, with its triple- sized cash
incentives, would shore up that $4 billion hole. Funny how he
mentioned that hole on Monday, and the Treasury announced the new
plan Friday.  'If he [DeMarco] doesn’t get to yes, then he has
no political leg to stand on,' says FBR’s Ed Mills, who
estimates the enhanced program could add one million borrowers to
its ranks. Mills says a ‘no’ from DeMarco would enable the
Obama Administration to replace him, which it tried to do once
before, only to be blocked by members of Congress.  'It would be
an appropriate response for him to do it,' says Barr of DeMarco.
'I do think they should participate.'  I asked Barr why the
Treasury waited three years to use the TARP funds for principal
reduction. The obvious answer is that this is presidential
election year, and the housing market is still floundering, but
Barr claims the Treasury was just being careful.  'It’s a use
of taxpayer funds, and you want to make sure you’re not
providing more of an incentive than is required,' he said. 'One
person’s successful program is another person’s bailout.'"

Treasury department stirs the pot

The Treasury Department is investigating a report that Freddie
Mac, the mortgage giant, bet against homeowners’ ability to
refinance their loans even as it was making it more difficult for
them to do so, Jay Carney, the White House spokesman, said
yesterday.  ProPublica and National Public Radio reported that
Freddie Mac, which maintained slightly tighter restrictions than
Fannie on homeowners’ eligibility to refinance, had a
multibillion-dollar investment whose value hinged on borrowers
continuing to pay higher interest rates.  Beginning in 2010,
Freddie bought several billion dollars’ worth of “inverse
floater” securities — essentially the interest-paying portion
of a bundle of mortgages — for its investment portfolio while
selling the far less risky principal portion. Fannie and Freddie
are supposed to be decreasing the size of their investment
portfolios.  There is no evidence that Freddie tailored its
refinancing standards to its investing strategy, but “inverse
floaters” make less money if the loans they cover refinance to
a lower interest rate.  Freddie issued a statement yesterday
defending its commitment to helping homeowners. “Freddie Mac is
actively supporting efforts for borrowers to realize the benefits
of refinancing their mortgages to lower rates,” it said. The
company said refinancing accounted for 78% of its loan purchases
in 2011.

HAMP 2.0

The expansion of the Home Affordable Modification Program (HAMP)
by the Treasury Department is expected to benefit special
mortgage servicers, mortgage insurers and nonagency
mortgage-backed securities holders, while having no material
effect on agency MBS, Keefe, Bruyette & Woods said yesterday.
Previously, if a borrower's first-lien monthly mortgage payment
was lower than 31% of income, the borrower was ineligible for
HAMP. Factoring other debts to the evaluation will expand the
pool of borrowers who can now qualify for HAMP.  Investors also
were given new incentives for accepting principal write-downs,
with the financial benefits for such an action increasing from a
range of 6 to 21 cents on the dollar to 18 to 63 cents.  The
Obama administration also extended the HAMP program deadline
through December 2013.  "We believe that the more flexible
debt-to-income ratio and the inclusion of some investor
properties will have a positive impact on modification activity,"
KBW analysts said in its research note.  "The impact of the
increased principal reduction incentives remains unclear.

While it should help the nonagency sector, the impact would be
far greater if there was GSE participation. The response from
FHFA on Friday afternoon suggests that the GSEs might not
participate," according to KBW analysts.  The research firm
expects the changes to have "no material impact on agency MBS
prepayment speeds."  However, special servicers in the mortgage
industry are expected to benefit from the modifications. Ocwen
Financial Corp.  earned $28.3 million in HAMP incentive fees in
the first nine months of 2011, and KBW believes other firms also
will benefit from an expanded HAMP program.  Barclays Capital
analysts also see the changes as having no significant impact on
agency MBS.  "The reason is that the vast majority of debt
forgiveness will be on delinquent loans, which are typically
already bought out of the agency MBS trust," Barclays wrote.
"The only effect might be from the moral hazard side: if
underwater borrowers in agency MBS pools start going delinquent
on purpose to qualify for debt forgiveness, speeds will obviously
rise. But we think this is unlikely to have a significant effect
on agency speeds."

2012 to be the best year for short sales?

2012 to be the best year for short sales?

The Mortgage Debt Forgiveness Act of 2007 allows an income tax
exemption for a homeowner whose mortgage debt is partly or
entirely forgiven by a bank.  It's set to expire Dec. 31, 2012.
Matt Alegi, a partner with the Potomac law firm Shulman Rogers
and chair of the firm's residential real estate practice group,
says the tax break has meant a savings in the tens of thousands
of dollars for individuals.  Typically, if someone were to have
$150,000 forgiven by the bank, Alegi says, "you just made another
$150,000 of income for tax purposes in that year."  So, say
someone makes $50,000 but had $150,000 forgiven by the bank. That
person is now paying taxes on a $200,000 income, and included in
a much higher tax bracket.  The loss of the relief will plunge
homeowners further into debt, Alegi says.

He also thinks the expiration of the Debt Forgiveness Act will
have an impact on short sales themselves. Homeowners could try to
push the short sale through this year to take advantage of the
tax break.  Alegi believes there will be strong lobbying to
extend the tax break. If it isn't extended, the appeal of a short
sale could greatly diminish for the homeowner.  To take advantage
of the Debt Relief Act, you need to fall under very specific
guidelines outlined by the IRS.  For example, the debt forgiven
is only for primary residences and the debt must have been used
to buy, build or substantially improve your principal residence
and be secured by that residence.  Alegi says homeowners who
spent the forgiven money on education or other bills do not
qualify.

Gridlock an Obama strategy?

When President Obama outlines his goals for 2012 during
Tuesday’s State of the Union address, he shouldn’t expect a
lot of cooperation from Republicans, senate Minority Leader Mitch
McConnell (R-Ky.) said yesterday.  “With the Obama economy
established now…unemployment is still at 8 ½%,” McConnell
said. “It didn’t work, and we’re not interested in doing
more of the things that don’t work.”  He said Obama was
“AWOL” last year on his bus tour when Republicans wanted to
tackle tax reform and entitlements, and he expects more of the
same this year.   “He was not involved whatsoever,” McConnell
said. “So I’m not optimistic, frankly, that in an election
year that he’s likely to be any more engaged than he was last
year.”  What’s more, he thinks the logjam in the nation’s
capital is part of Obama’s agenda.  “That’s his
strategy…to demonize Congress, to complain because he can’t
continue to get everything he wants, like he did the first two
years,” he said. “It’s all about his re-election and not
about the country.”  One thing that McConnell thinks will get
done is the payroll tax cut extension, which was extended for
only two months in December when Congress couldn’t come to an
agreement.  “We’ll be back at trying to figure out how to do
that for the balance of the year and how to pay for it,” he
said. “We don’t want to add to the deficit.”

What the $25 billion bank deal means

According to an Associated Press report, five major banks -- Bank
of America, JPMorgan Chase, Wells Fargo, Citibank and Ally
Financial -- and US state attorneys general could adopt the
agreement within weeks. It's expected President Barack Obama will
mention new developments in the negotiations in his State of the
Union address today.  A settlement between the banks and the
states doesn't mean homeowners who lost their homes to
foreclosure will get them back. In fact, they're unlikely to
benefit much at all financially, though the total financial
settlement could be as high as $25 billion.  What's worse is the
settlement does not apply to loans held by Fannie Mae or Freddie
Mac. Since Fannie and Freddie own about half of all US mortgages
- or 31 million US home loans - that means a lot of homeowners
who have been hurt by the banks' deceptive foreclosure practices
won't be getting much-needed assistance.  Nearly 11 million
people - one in four homeowners - owe more than their home is
worth. According to current guidelines, these underwater
homeowners have few options and little chance at refinancing.
Here's how the settlement could shape up:

-  $17 billion would go toward reducing the principal balance
struggling homeowners owe on their mortgages.

-  $5 billion would be put into a reserve account for various
state and federal programs. A portion of this money would cover
the $1,800 checks that would be sent to homeowners affected by
deceptive practices. Only about 750,000 Americans, or half of the
households who might be eligible for assistance under the deal,
will likely receive checks.

-  About $3 billion would be used to help homeowners refinance at
5.25%, far below current mortgage interest rates.

If the proposed settlement terms are accepted, roughly 1 million
of these homeowners could see the principal amount of their
mortgages reduced by an average of $20,000. That's good news for
some, but bad news for the other 10 million homeowners who would
like to claim a principal reduction but won't qualify.  The
better news is this settlement has the potential to reshape
long-standing lending guidelines and make things easier for
at-risk and underwater homeowners across the board. But critics
say it doesn't do enough. Sen. Sherrod Brown (D-Ohio) tells the
Associated Press: "Wall Street is again trying to pass the buck.
Instead of criminal prosecutions, we're talking about something
that's not more than a slap on the wrist."  Some states have
disagreed over what to offer banks, with states like New York,
Delaware, Nevada and Massachusetts arguing banks should not be
"protected from future civil liability." The deal will not fully
release banks from future criminal lawsuits by individual states,
and a few of those states' attorneys general have already
promised to pursue their own investigations.  Bank officials have
argued few, if any, foreclosures wrongfully took place as a
result of documentation issues. Ally Financial CEO Michael
Carpenter has been among the most vocal, claiming the company
found no instances of wrongful foreclosure after its own internal
audit. Carpenter has said he will fight the government in court
if need be.

US Treasurys edge higher after Greek setback

US Treasurys edged higher today, after euro zone finance
ministers rejected an offer by private creditors to restructure
Greek debt, keeping alive fears of a default.  Benchmark 10-year
note's yield was at 2.06%, compared with 2.058% in late US trade
on Monday. The yield rose as high as 2.094% on Friday, its
highest since early December. The 30-year bond yield was at
3.14%.  Demand for safe-haven US debt was further boosted after a
report rekindled fears that Portugal, seen as the second most
risky country in the euro zone, could be the next potential
default candidate after Greece.  Further dousing optimism,
Germany denied a report that it was ready to boost the combined
firepower of the euro zone's rescue funds to 750 billion euros
($979 billion).  During its two-day policy meeting starting on
Tuesday the Federal Reserve is expected to push out expectations
on when it will next raise interest rates until at least 2014,
and the meeting will also be closely watched for any hints of new
QE, which analysts expect would focus on mortgage-backed bonds.
The Treasury Department will sell four-week bills and two-year
notes later in the day. The Treasury will sell a total of $99
billion in new two-year, five-year, and seven-year notes this
week.

Mortgage writedowns to cost taxpayers $100 billion

Forgiving mortgage debt on Fannie Mae and Freddie Mac loans would
cost the taxpayer-funded companies almost $100 billion, their
regulator said.   The Federal Housing Finance Agency (FHFA) said
that as of June 30, the companies guaranteed nearly 3 million
mortgages on single- family homes that are underwater, or worth
less than the loans they secure.  "FHFA estimates that principal
forgiveness for all of these mortgages would require funding of
almost $100 billion," FHFA Acting Director Edward J. DeMarco said
in a Jan. 20 letter to Representative Elijah Cummings, a Maryland
Democrat who had threatened to subpoena the information. The FHFA
posted the letter on its website today.  Nearly 80% of the Fannie
Mae and Freddie Mac borrowers with negative equity were current
on their payments, DeMarco said.

DeMarco, whose agency was created by Congress to minimize losses
at Fannie Mae and Freddie Mac and is independent of President
Barack Obama's administration, has maintained that principal
forgiveness would increase the size of the government's bailout
of the companies, which have cost taxpayers more than $153
billion since they were taken under government control in 2008.
The agency compared the cost of principal forgiveness to the
companies' current practice of forbearance, which allows
delinquent borrowers to defer payments.  "Given that any money
spent on this endeavor would ultimately come from taxpayers and
given that our analysis does not indicate a preservation of
assets for Fannie Mae and Freddie Mac (FMCC) substantial enough
to offset costs, an expenditure of this nature at this time
would, in my judgment, require congressional action," he said.

WSJ - EU tries to revive Greek talks

European Union finance ministers today piled pressure on Greece
and its private-sector creditors to do more to ensure that a
proposed deal to restructure Greece's private-sector debt will be
enough to put the country back on a firm fiscal footing.  The
International Monetary Fund (IMF) and the euro zone's four
triple-A-rated countries-—Germany, the Netherlands, Finland and
Luxembourg—are pushing for a low average interest rate on new
bonds to be issued as part of the restructuring, in order to
ensure the government can pay its debts in the future.  But as
they were heading to a meeting Tuesday, EU finance ministers also
urged Greece to implement tough austerity and structural reforms
and provide more written assurances to its partners that it would
commit to its pledges before further aid can be released.
Austrian Finance Minister Maria Fekter said she's "not pleased"
with progress so far. "We're sending a very direct message to
Greece that the community expects more, also in terms of
structural reform," she told reporters. "We're not pleased and
only when there's a written message on the table in front of us,
can further assistance be discussed."

Greece's debt restructuring is planned to take the form of a bond
exchange in which creditors holding some €200 billion ($260.32
billion) in debt would swap their securities for new instruments
with half the face value. The key sticking point is how much
interest the new bonds should pay.  The restructuring is part and
parcel of the second bailout program for Greece amounting to
€130 billion. Without this loan, Greece will default on a
€14.4 billion bond maturing March 20.  But talks in Athens with
the Institute of International Finance, which represents the
majority of Greece's private-sector creditors, have dragged on
for three weeks and stalled over the weekend. Private-sector
creditors said in a final offer that they won't accept an average
interest rate of less than 4%.  The IMF voiced concerns yesterday
that the deal being discussed by Greece and the creditors would
leave the country with a higher-than-expected debt burden in the
years ahead, people familiar with the matter said.  That sets up
a difficult choice: press bondholders to accept more losses, or
accept that Greece's peers and the IMF will have to kick in more
support.

Olick - foreclosure investors a double edged sword

"The best and most expeditious way to clear the vast inventory of
foreclosed properties weighing down today’s housing market is
to get more investors in and sell them these properties at bulk
discounts.  That’s what the Obama administration and Federal
regulators are currently considering for the thousands of homes
currently owned by Fannie Mae, Freddie Mac and the FHA.  While
big private equity funds are still largely in a very tedious
deal-making stage with banks or waiting on the sidelines for a
government program, smaller individual investors are getting in.
Nearly 23% of home purchases in December were by investors,
according to a new survey from Campbell/Inside Mortgage Finance.
That is a slight increase from November, but the share has
remained largely unchanged for the past year.  What has changed
dramatically is how many of these investors are using
all-cash…74% according to the survey, which also found that,
'cash buyers are able to bid significantly lower—and
successfully—on many properties because they offer a shorter
and more reliable closing timeline.' That is precisely what
mortgage servicers want.

'While investor bids may not be the first offers accepted, they
often end up winning properties after other homebuyers are
eliminated because of mortgage approval or timeline problems,'
according to the survey authors. 'Appraisals below the contracted
price are a common reason for mortgage denials. Most mortgage
financing timelines are now in excess of 30 days.'  There has
been a lot of concern among industry analysts that bulk
foreclosure sales would push home prices down further, but it
appears that is already happening, as investors usually offer
10-20% below list price, while first time home buyers and current
homeowners are generally offering list. If the offers are
competitive, cash will prevail."